Xtant Medical Holdings, Inc.
Q1 2024 Earnings Call Transcript

Published: 15 May 2024

[Operator:]

Greetings. Welcome to the Xtant Medical Holdings, Inc. First Quarter 2024 Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Brett Maas. You may begin.

[Brett Maas:]

Thank you, operator, and welcome to Xtant Medical's first quarter 2024 financial results call. Joining me today is Sean Browne, President and Chief Executive Officer; Scott Neils, Chief Financial Officer. Today's call is being webcast and will be posted on the Company's website for playback. During the course of the call, we may make certain forward-looking statements regarding to our future events and the Company's expected future performance. These forward-looking statements reflect Xtant's current perspective on existing trends and information can be identified by such words as expect, plan, will, may, anticipate, believe, should, intends and words with similar meaning. Such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, including those noted in the Risk Factors section of the Company's annual report on Form 10-K filed with the SEC on April 1, 2024, and in the subsequent SEC reports and press releases, results may differ materially. The Company's financial results press release and today's discussion include certain non-GAAP financial measures. Please refer to the non-GAAP to GAAP reconciliations, which appear in our press release and are otherwise available on our website. Note that our Form 8-K, filed with our financial results press release provides a detailed narrative that describes our use of such measures. For the benefit of those of you who may be listening to the replay, this call was held and recorded on May 15 at approximately 4

[Sean Browne:]

Thank you, Brett, and good afternoon, everyone. I am pleased to announce another strong order for the Xtant team with 55% growth over the prior year and preparing our 2024 outlook for the beginning of the year, we recognize the first two quarters would be difficult due to a couple of significant supply chain challenges. However, by completing our first quarter, we are confident about our progress toward addressing these challenges and consequently, are raising revenue guidance from $112 million to $116 million to a new range of $116 million to $120 million. Moreover, we are quite pleased with the growth of the Surgalign assets we acquired in 2023. We Keep in mind, these product lines declined 37% over a period of six consecutive quarters prior to becoming part of Xtant Medical. Our first priority was to stem the losses and then start investing and building where it makes sense. Our collect team has done a terrific job of getting the flywheel moving on this business. More specifically, the Surgalign products have helped us transition some of our customers off the old Xtant hardware lines that were at risk which was a main theme in our investment thesis for that acquisition. With the Surgalign business, we saw an affordable way to dramatically improve our growth platform with new IDN contracts, new distributors in international distribution network and a nice updated adult retentive spine fixation business that could help us replace our aging X-spine systems. Moreover, we also saw a significant opportunity in pulling through our best-in-class biologics. From an organic growth perspective, we define as revenue growth, excluding contributions from products acquired during the previous 365 days towards where there are no durable sales. First quarter revenue was flat over prior year quarter. And as I mentioned in the last two quarterly conference calls, we anticipated low organic growth in the first half of this year. However, as our supply chain challenges abate, and we introduce new products to the market, we anticipate delivering organic growth during the second half of 2024, reaching double digits. Let me reiterate that. We will reach double-digit organic growth in the second half of 2024. There are three key areas that have affected our growth thus far, and we are actively addressing each of them to ensure a robust and sustainable growth trajectory for Xtant. The first are stem cells. This product line has been an extremely short supply since August of last year. Happily, as of April, we are back up to a strong inventory levels and are building this business back up again. Second, OEM sales. We had strong OEM sales in the first half of last year due to one of our competitors supply challenges. This year, as we roll out new pick lines like our amniotic membrane allografts, this will primarily be an OEM product line that we will expect will do well in the second half of fiscal year 2024. Third, the cannibalization of our old X-spine hardware products by Surgalign acquired products dampens our core organic growth rate. However, as I mentioned before, this is part of our broader plan to upgrade our surgeons to the newer, more improved Surgalign product lines. From a profitability perspective, we were adjusted EBITDA positive and despite investments to rebuild the Surgalign infrastructure to support our future growth. So, from an operating expense perspective, we expect to see operating expenses decline as a percentage of revenue and combined with improvements to gross margin will drive growth in adjusted EBITDA in Q3 and beyond. At this time, I'll now provide an overview of how we build a platform that will give us sustainable long-term growth. As a reminder, our four key growth pillars are focused on

[Scott Neils:]

Thank you, Sean, and good afternoon, everyone. Total revenue for the first quarter of 2024 was $27.9 million compared to $17.9 million for the same period in 2023. Our 55% increase is attributed primarily to product sales from the recently acquired Surgalign Hardware and Biologics business. Gross margin for the first quarter of 2024 was 62.1% compared to 58.7% for the same period in 2023. The increase was primarily attributable to greater scale and efficiencies, partially offset by higher product costs from which we expect to start seeing relief as we expand the sale of internally produced biologics. First quarter 2024 operating expenses were $28 million, compared to $12.1 million in the same period a year ago. As a percentage of total revenue, operating expenses were 75% compared to 68% in the same period a year ago. General and administrative expenses were $7.8 million for the three months ended March 31, 2024, compared to $4.9 million in the same period in 2023. This increase is primarily attributable to additional employee compensation expense, additional legal and accounting expenses and amortization of intangible assets associated with the Coflex and Cofix product lines. Sales and marketing expenses were $12.5 million for the three months ended March 31, 2024, compared to $7.1 million for the same period in 2023. This increase is primarily due to additional independent agent commissions, additional compensation expense associated with additional headcount to drive continued growth in new products and consulting expenses. Research and development expenses were $0.5 million for the three months ended March 31, 2024, an increase from $0.2 million in the same period of 2023. This increase is primarily due to increased headcount related to increased focus on new product introduction, which Sean highlighted earlier as one of our pillars of growth. Net loss in the first quarter of 2024 was $4.4 million or $0.03 per share compared to a net loss of $2.1 million or $0.02 per share in the comparable 2023 period. Adjusted EBITDA for first quarter of 2024 was $0.1 million compared to an adjusted EBITDA loss of $0.3 million for the same period in 2023. As of March 31, 2024, with $4.5 million of cash, cash equivalents and restricted cash, $21.5 million in net accounts receivable, $38.7 million of inventory and $6.7 million available under our revolving credit facility. In addition, on May 1, we closed an additional $5 million of term debt under our term debt facility with MidCap to provide for additional working capital. Operator, you may now open the line for questions.

[Operator:]

[Operator Instructions] Our first question comes from Ryan Zimmerman with BTIG. Please proceed.

[Ryan Zimmerman:]

Nice quarter to start the year here. So, I want to start with guidance a little bit, Sean. You guys beat consensus by a little less than, I don't know, $1 million -- or excuse me, a little more than $1 million, my apologies. You took up guidance $4 million on both the low end and the top end. So just talk to us a little bit kind of, one, what's driving that? Two, if you can comment a little bit on pacing dynamics through the quarters, kind of what you expect from a seasonal perspective? And really, the other last part of that question is just what's driving it? Is it orthobiologics within Surgalign? Is it hardware? I think most of the assets you picked up on Surgalign were more hardware related. So just a little more color there would be helpful as well. And then I have one follow-up.

[Sean Browne:]

Sure. Okay. Just to start off with why we bumped our guidance so much. Part of are starting out relatively low because we were concerned about both this first quarter and the second quarter coming up with respect to just the supply chain challenges. There's a number of things that I've outlined here. But we now feel really good. The first quarter came out a little bit better than what we expected. Again, you saw from the guidance that you had set as well as Craig-Hallum folks. When I look at Q2 and beyond, I start to see that we've got our new amnio product that's starting to come out, the Surgalign products that we have really excited about their growth are going nicely. You're right is been in the hardware side where they've been helping us, but also opportunities that the hardware products open up for our Xtant biologic products. So, all in general, there's just a mix of a lot more -- I see a better velocity of growth that we're coming into the beginning of this year, really worried about this first half. And so right now, I'm starting to feel pretty good about where we are in this first half, so that in the second half, we should really start to get some really nice good traction. I hope that answered -- I don't know if it answered all your questions. What did I miss?

[Ryan Zimmerman:]

I guess just in part of that, it's just kind of from a pacing perspective, how you think about seasonality given the results this quarter, how just to think about kind of the pace through the rest of the year. And then, I'll just ask my second question. Now it's just around margins that came in termly better than I think we were expecting. Great to see. Talk to me about, one, the sustainability of your margin gains, kind of what your expectations are over time for margins and kind of where you think you can kind of exit maybe this year?

[Sean Browne:]

Yes. I'll take the seasonality question. I'll throw it over to Scott and I might have a color -- and added color to that on the margin side. So, we think about seasonality, certainly, in Q2, things typically pick up. Q3 as you can well imagine, normally, our business would flatten to Q2. I think that we're going to see a little more acceleration even in -- as we think about Q3 and even more so in Q4 because in Q3 and Q4, there'll be more product lines that we'll be releasing from our end that we're manufacturing. And so, I do believe that those products will have a nice pickup, specifically because they really address OEM opportunities. And then, I'll throw it back to Scott with respect to how he sees margins and progressing throughout the year.

[Scott Neils:]

Sure. I guess speaking to gross margins, I see Q2 and Q3 being largely consistent with what we've seen here in Q1. And a big driver of that is, even as we start this new product rollouts, as we start selling into that from an amnio side that won't necessarily help our gross margin all that much, where we'll see the benefit from that will be on the contribution margin side, where we'll really start to see a pickup from a gross margin perspective. I think we'll be in Q4, where we'll start selling into that stem cell, and we could see that increase by as much as two to three points within Q4.

[Operator:]

Our next question comes from Chase Knickerbocker with Craig-Hallum. Please proceed.

[Chase Knickerbocker:]

I have two. I'm going to ask them both upfront. Maybe on the amnio side, how much of the opportunity should we think of as OEM versus your distribution work? And then along those same lines, what should we think of as far as immediate impact from the amnio launch, I mean do you think we could have kind of material revenue as soon as kind of Q3? And just last for me. Any way to quantify the impact of what the supply chain issues were on orthobiologics from the stem cell side as far as what could you have done if not for those headwinds.

[Sean Browne:]

Okay. Let me -- I'll jump into those. Okay. So, first things first, on the amnio side. The -- we make an amnio product today, we sell an amnio product today. There's a little bit less than $1 million, but we buy that from another source. We don't get great pricing. And quite frankly, we can't give out a lot of margins. With our own product line, we were actually surprised because this is not why we really built this. We actually built it because there seem to be such a significant OEM opportunity, especially on the surgical side and particularly in the wound care side. But what we'll see is that we do think that we pick up. But again, it's not a huge pickup on the -- our own internal product, but where we do see significant revenue that could be coming in is in the second half of this year for those product lines. And then the other question that you just asked that was amnio and then it was how significant -- is that what you're -- I'm sorry, I forgot what the second question was to that. It was amnio...

[Chase Knickerbocker:]

The lines as far as what the impact was from a dollar perspective and kind of what you could have done. Is there any way to kind of quantify that just as far as it relates to kind of the go-forward?

[Sean Browne:]

Yes. So, when we were at our peak in, say, July of last year, July August of last year, we were doing just about $800,000 a month in stem cell sales. That dropped off to -- I mean it literally dropped off the table to around $200,000 a month because that's about all the resources we get all supplies we could get. What we see and the thing of it is, is that our opportunity, what we looked at was substantially higher than even $800,000 because we never could get enough product. Right now, we've been working with one of our suppliers to help us get that product. And so, we are set for a while, and it is something that we feel really, really good moving forward, having not only the product in hand, but then eventually our own product line as well, and that will be significantly more profitable and we think a better product, too. So overall, we feel very good about what the opportunity sits out. And it's a little bit of why I'm stepping forward and coming out a little bit harder, a little bit higher on our guidance. And so that's part of why I'm feeling good about where we are.

[Operator:]

[Operator Instructions] We have a follow-up coming from Ryan Zimmerman with BTIG. Please proceed, Ryan.

[Ryan Zimmerman:]

I couldn't get enough guys. I want to ask one more question. Just on the amniotic products a little bit. I mean your 650 distributors that you have now, I appreciate you're going to go deeper into those. I mean, being amnio -- a little bit of a different call point than, say, spine? How do you think about the distribution sales force today, their ability to kind of pick up amniotics, your need to pick up maybe new distributors or those that are maybe focused outside of spine? Just if you could talk a little bit about that, Sean, and kind of how you balance that dynamic of having this new product category outside of maybe core spine.

[Sean Browne:]

Yes. Just first things first, we are only going to be selling this within -- and again, if other distributors want to carry by all means, we got it, right? So, we have an open distribution model. But this -- when we built these products, it was really built for the OEM side of things. And by the way, we have this $1 million product line that we knew that we could sum it out and have our own products, right, for basically twice the margins. And so that in of itself, a pick up there. But then b, as we've gone down the path and we rolled this out, I was surprised to see the number of our distributors said, oh, yes, I saw a little bit here and there. I sell 100,000 here or 50,000 there. And so, it turns out that our network actually does a fair amount in this market as it is, all primarily all on the surgical side, right, the surgical repair side. And then, when we were building this product line, we were really building it as an OEM supplier through both the wound care and the surgical repair side. And so, we have deep actually expertise within our company, of guys that have contacts in this OEM market. And so, we -- actually, we're really excited because we have quite a bit of demand that's starting to build up. And so, it is something that we -- when we built this was really more as an OEM product. But as we're looking at it now, it turns out there may be more there as our own Xtant-branded product. So more to follow on that. But it's actually been a nice add to what we're doing more so than what we expected.

[Operator:]

We have no further questions in the queue. I'd like to turn the floor back to management for any closing remarks.

[Sean Browne:]

Great. Thank you, operator. Overall, I'm very pleased with the progress we have achieved in our Q1. Our overall revenue growth of 55% is a testament to the outstanding work our team has done in turning around and growing the acquired Surgalign business. As the year progresses, we expect to continue to grow organically. So, by the end of fiscal year 2024, we anticipate double-digit organic revenue growth. Inorganically, we continue to be very active in looking for companies that provide capabilities, capacity and cash flows, driven by an taking over the supply chain for both internally produced products and improved vendor management of the acquired Surgalign products, we see solid growth in the first half of the year with increasing velocity as we produce more of our own goods in the second half of the year. In closing, I want to reiterate our mission, honoring the gift of donation by allowing our patients to live as full and complete a life as possible. I appreciate the dedication of our valuable employees. Without them, our success and achievements would not be possible. Thank you for joining us today and for your continued support.

[Operator:]

Thank you. This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.